EXCLUSIVE BLOG: Leasehold is not broken, so why replace it?
Industry figure says that while leasehold needs to be improved for the benefit of both professionals and leaseholders, replacing it is wrong.
Matthew Pennycook recently announced proposals to replace leasehold and make commonhold the default tenure and a white paper has now been published.
New leasehold flats will be banned as the Government takes steps to honour its manifesto commitment to ensure commonhold becomes the default tenure.
I support the initiative to reform the current system but am also mindful of the challenges that will need to be overcome to make it work properly for all types of development.
But does leasehold need to be banned? If it’s broken, can it be fixed, rather than replaced in such a way that will result in considerable upheaval?
My view is that leasehold is not the failure that some have stated, but it’s not perfect either. There are aspects of leasehold which need to change – we recognise that there have been some abuses of the system, and are keen to work with the government to reform leasehold to the benefit of both residents and professionals.
Long overdue
Many of the issues with the current system relate to property management and we believe that the proper regulation and control of managing agents is long overdue. It is fixing this which is key to success in whatever system – commonhold or leasehold is used as a form of land tenure.
When residents agree to collective management, the option for commonhold is already available. But the fact that there are currently more books on commonhold than there are instances of it should raise alarm bells.
Remember that flat owners who own their own their freehold through a share in a freehold owing company with a 999-year lease at a nil rent are in as good as or better position than those owning within a Commonhold structure.
There are several reasons for this including insolvency (the freehold company’s debts are not those of the leaseholders); service charges (the current service charge regime does not apply to Commonhold) and certainty of lease terms – the law as regards what can and cannot be deviated from away from the original grant is well established.
Importantly, the legal framework around leasehold is well-established and understood, providing clarity on rights, responsibilities, and dispute resolution mechanisms. The transition to commonhold will require residents and professionals to adapt to a new ownership model.
We all understand the need to build more homes, specifically affordable housing. But to significantly increase housing delivery many new homes will, through necessity, be situated in apartment blocks in high density areas. For the reasons outlined above, leasehold is the only form of land tenure that can be used in these circumstances.
Embedded
Leasehold is embedded in property law and is effective in most circumstances. With some adaptations, it can continue to remain effective.
Leases have the flexibility to be varied, amended and extended during the lifetime of a development. The position can be altered to take account of individual circumstances, and this flexibility is a benefit of the current system.
ALEP, like many others, was pleased that the Labour government did not seek to abolish leasehold within 100 days of taking office, as had been suggested previously.
With over five million leases in the UK, this would have caused substantial disruption for millions of residents and professionals and would have been wholly impractical.
As ALEP, we would be pleased to work with government to improve the current system, while also exploring how commonhold can work in some circumstances.
Mark Chick, director of ALEP and a Partner at Bishop & Sewell LLP.
The 3 big issues where as far as I can tell, the government has failed are (1) Ground rents (2) Cladding (3) Failure to regulate management companies. The letters RR strike fear into most leaseholders.
The Irish government said from Day 1 they would pick up the bill for cladding so no-one lost out, in the UK it was a complete fudge where some millionaires, received benefits worth millions in London fora couple of very expensive apartments, but retired shipyard workers in the North East received no help for 4 cheap apartments for their retirement and ended up bankrupt after a lifetime of honest work.
Ask any RTM group about their reserve funds after certain managing companies have been forced out…. they disappeared faster than a rabbit out of Paul Daniels hat.
Leasehold is currently too full of adverse stories to recommend it to either family nor investor.
For one, my own experience is that freeholds are invariably profitable, and I have control over them, leaseholds, are just burdensome, and not worth the time and money quite frankly.
I concur we need high density housing, but the current leasehold system has failed to deliver this fairly, and a complete overhaul is needed.
Leasehold IS broken and exploited by Large Freeholders who actually contribute nothing to UK finances, indeed, they handicap them by offshoring the ground rents, meaning money lost from the UK economy. Leasehold dose not exist outside of England and Wales, and I see this reflected in my portfolio and my profitability. I do not buy any leaseholds now as a consequence. To argue leasehold is not broken seems to be a position only held by those with vested interests in maintaining the status quo. Tax legislation should be used to curb freeholder excesses on the ground rent front, for example, by taxing grounds rents in excess of £250 per annum at 125%.